FREQUENTLY ASKED QUESTIONS
DEFERRED RETIREMENT OPTION PLAN (DROP)
(REVISED AUGUST 2015)
1) What is the Deferred Retirement Option Plan (DROP)?
DROP is a program that provides employees access to a lump sum benefit in addition to their monthly retirement
benefit when they terminate employment and retire. Employees who became members of the system before
January 1, 2012, are eligible to participate once they have 20 years of credited service. Employees who became
members of the system on or after January 1, 2012, are not eligible to participate.
2) How does DROP work?
A member must voluntarily and irrevocably elect to enter into the program with their employer for a period of up to
60 months. During the DROP period, the member remains in the employ of the employer (a member cannot
transfer to a non-PSPRS position or change employers while in DROP) as a full-time paid firefighter or full-time paid
certified peace officer but no member or employer contributions are made to the system for members who have
twenty (20) years of credited service prior to January 1, 2012, therefore no additional years of credited service are
accrued on the member's behalf. Members who have twenty (20) years of credited service on or after January 1,
2012, must continue to contribute while in DROP. Effective August 2, 2012, these contributions, along with a
possible 2% interest as provided for in 38-844.08 paragraph A.3, will be refunded to the member and included with
the DROP payment.
3) How is DROP calculated and what is the interest rate?
The member's monthly pension is calculated based upon the years of credited service and average monthly
compensation at the beginning of the DROP period. This monthly pension amount is credited to a DROP
participation account with interest that is at a rate equal to the assumed earnings rate of return determined by the
board of trustees, currently 7.50% for Fiscal Year 2015-2016, except for a member who has less than twenty (20)
years of credited service on or after January 1, 2012 and who elects to participate in DROP on or after January 1,
2012, then the amount credited monthly is the amount that represents interest at a rate equal to the average
annual return of the System over the period of years established by the board of trustees. This amount cannot
exceed the System’s assumed investment rate of return but will be at least two percent. The rate for Fiscal Year
2015-2016 is 3.1%. At the end of the DROP period or prior to that time if the member terminates their employment,
the monies in the DROP participation account will be either paid to the member in a lump-sum amount or if allowed
by the Internal Revenue Service paid in a lump-sum distribution to an eligible retirement plan or individual
retirement account.
4) What if I enter DROP, but continue employment beyond the 60 months? Will I receive a higher pension
benefit for working longer?
No. You will receive a lump sum payment of only the pension monies that were credited to you in the DROP account
at the time of your termination – thus, the DROP participation account will no longer be credited with the DROP
monthly payment amount and you will also forfeit all interest earned as a penalty for not fulfilling the DROP
requirement. Your pension benefit will not be adjusted. No additional credited service accrues and no employer and
employee contributions are paid into the PSPRS.
5) If I participate in the DROP, do I still earn my regular pay and benefits (seniority, vacation, pay raises,
promotions, etc.) like other public safety personnel not in the DROP?
Yes. Your employment status with your employer does not change.
6)
Can my employer force me to take the DROP option?
No. DROP is strictly voluntary on the part of the employee. The employee can also select the length of DROP
participation, from one to sixty months. Since this is only an alternate method of benefit accrual, an employer
cannot prohibit an employee from entering the DROP.
7)
I am not currently paying into Social Security. Since I am not making pension contributions during the DROP
period, will I have to have social security deducted from my regular paycheck during the DROP period?
No. If your employer has previously exempted police officers or firefighters from social security, you are still
exempted as a police officer or firefighter since you are still a member of a qualified retirement plan.
8) What are some tax implications for the individual member?
As a general rule, a lump sum distribution taken directly by the recipient before the age of 50 will result in payment
of taxes on that amount at the individual's tax rate plus a 10% penalty tax. If this amount is taken directly by the
recipient, the Internal Revenue Service requires us to withhold 20% of the monies distributed that may or may not
cover your tax liability. If you authorize the System to roll over your DROP proceeds directly to an IRA or other
qualified retirement plan there are no immediate tax consequences. You would pay taxes on these funds only when
you receive a distribution from your IRA or other qualified retirement plan. Keep in mind that tax laws can change,
and they are complex. We urge you to seek the advice of a tax professional to determine what is best for you and
how you will be affected.
9)
Where may I roll over the lump sum payment?
You may roll over the payment to an IRA (an individual retirement account or individual retirement annuity),
another qualified plan, a section 403(b) annuity or account, or a governmental section 457 plan. A governmental
section 457 plan may not accept a rollover from a qualified plan unless it agrees to separately account for amounts
rolled into it. You should contact the IRA sponsor or the administrator of the employer plan for information on how
to do a direct rollover. PSPRS will make the payment directly to your IRA or employer plan based on directions from
you.
10) How much may I roll over?
If you wish to do a rollover, you may roll over all or part of the amount eligible for rollover. PSPRS can tell you what
portion of a payment is eligible for rollover.
11) If I do a rollover to an IRA, will the 10% additional penalty tax apply to early lump sum distributions from the
IRA?
Yes. The Public Safety exception applies only to amounts distributed from a governmental defined pension plan and
does not apply to subsequent lump sum distributions from an IRA. If you roll over to an IRA, the rules relevant to an
IRA plan are followed and generally you will not be able to take a distribution prior to age 59 ½ without penalty.
(Certain exceptions apply that are only available for IRA’s.)
12) If I do a rollover to a 457 plan, will the 10% additional penalty tax apply to early lump sum distributions from
a Section 457 plan?
Yes. The Public Safety exception applies only to amounts distributed from a governmental defined pension plan and
does not apply to a subsequent distribution from a 457 plan. There is a special rule for rollovers to Section 457 plans
that requires the 457 plan to separately account for rollovers from qualified plans. Although the 457 plan is required
to maintain a separate account for rollover amounts, the Public Safety exception will no longer apply to the rollover
if withdrawn as a lump sum from the 457 plan before age 59 ½.
13) What about the “Retirement after Age 55” rule?
Plan participants who have separated from service after reaching the age of 55 are not liable for the 10% penalty tax
for distributions made by a qualified plan. This is not relevant for Public Safety employees because they have the
special exception at age 50.
An example would be if a police officer retired after reaching age 50, rolled his DROP money into a 457 plan, and
withdrew the proceeds as a lump sum when he reached 55. He would be liable for the 10% penalty. This is so
because the “normal retirement age” exceptions (50 or 55) apply at the time of retirement or leaving employment.
When an amount is rolled over the exceptions to the additional income tax on premature distributions are
determined by the receiving plan.
14) Will the 10% additional penalty tax apply if I was younger than age 50 at the time I retired and rolled my
DROP money over even if I am age 50 or older at the time I receive my lump sum distribution?
Yes, the 10% additional penalty tax will continue to apply to your distribution if you receive it as a lump sum until
you reach age 59 ½, even if you are age 50 or older at the time you receive your distribution. This is true for an IRA
or 457 plan. There are certain exceptions, depending on the recipient plan.
15) During the time that I participate in DROP, will I still be eligible for any pension benefit increase (PBI) – also
referred to as the cost of living adjustment?
No. The rules regarding the benefit increases will apply at the end of the DROP period. Your eligibility for an
increase is determined by your status as of July 1. Please review the PS FAQs for more details on eligibility and how
the benefit increase is determined.
16) If you are killed in the line of duty during the DROP period, what is your spouse entitled to receive?
Your eligible spouse will be entitled to receive 100% of your average monthly benefit compensation for the duration
of their life; however, the accumulated DROP monies will be paid to the members named DROP beneficiary on file.
17) If you resign employment after the DROP period begins or after the end of the DROP period, can you become
reemployed with a different employer as a police officer or firefighter and re-enter the PSPRS?
You can take a job with a different employer as a police officer or firefighter, but you cannot reenter the PSPRS.
Your pension would continue to be paid to you, however, effective July 20, 2011, your new employer must start
contributing an alternate contribution rate (ACR) to PSPRS on your behalf. No ACR is required for retirees hired
prior to July 20, 2011 who contribute to another retirement system.
18) I have a certified domestic relations order on file with the Board of Trustees. How does this affect my DROP
account?
The split of a member's pension and DROP will be determined based on the language (and PSPRS procedures) in the
certified domestic relations order and will take place at the end of the DROP period when the pension and lump-sum
payment s are made.
19) What about a job related disability during the DROP period?
You may apply for a job-related disability under the PSPRS during the DROP period. If you are awarded a job related
disability, you must terminate employment. You may not be moved or transferred to a non-PSPRS position and
continue employment with your employer. If you wish to continue employment with your employer in a non-PSPRS
position, you must follow the return to work rules outlined in A.R.S. 38-849.E-J & M. Any deviation from these rules
may result in suspension of pension benefits.
20) If I receive discipline (leave without pay) during my DROP period, are my DROP benefits reduced?
No. Disciplinary sanctions have no bearing on the amounts credited to your DROP participation account.
21) What if I am fired (terminated) while participating in the DROP?
Your DROP period ends with your separation from employment with your employer.
22) What if I successfully appeal my termination and I am reinstated?
If your termination is reversed and the court orders that you be reinstated, a member's participation in the deferred
retirement option plan, minus any benefits previously distributed pursuant to the PSPRS statutes, shall be reinstated
for the duration of the original deferred retirement option plan participation period designated by the member on
the appropriate deferred retirement option plan participation form.
23) May I access my DROP funds in an emergency?
No. There are no hardship provisions allowed.
24) How should I go about analyzing whether I should enter into the DROP?
Generally, if you have attained your maximum salary at your position and do not anticipate any additional salary
increases, you may want to consider the DROP. Remember that this is an important financial decision and is
irrevocable. It cannot be changed even if your personal or family circumstances change dramatically after you begin
DROP. You can run an estimate based on your contributions in your Member’s Only account located on the website
at www.psprs.com or you can contact your local board to request an estimate based on your salary records. Once
you obtain the estimate, you will need to go to the on-line DROP Estimator and enter the monthly benefit amount
along with the current DROP interest rate to estimate your DROP payout. You should consult with a financial advisor
to determine if DROP would be beneficial to you.
25) If I have 32 or more years of credited service in the system, am I still eligible for DROP?
Yes.
26) How do I calculate my DROP lump sum amount?
You can run an estimate based on your contributions in your Member’s Only account located on the website at
www.psprs.com or you can contact your local board and request an estimate based on your salary records. Once
you obtain the estimate, you will need to go to the on-line DROP Estimator and enter the monthly benefit amount
along with the current DROP interest rate to estimate your DROP payout.
27) How can I access my DROP account information?
You can access your DROP account information in the Member’s Only program located on the website at
www.psprs.com. It may take approximately 1-3 months from the time your local retirement board submits your
DROP application to PSPRS for your DROP account information to be visible in the Member’s Only program.
28) These FAQs are provided as general information only and should not be construed as tax advice.
We strongly encourage you to consult with your professional tax advisor before taking a distribution from an
employer plan to determine how a distribution from the plan may affect your individual situation. You can also find
more detailed information on the federal tax treatment of payments from employer plans in IRS Publication 575,
Pension and Annuity Income, and IRS Publication 590, Individual Retirement arrangements (IRAs). These
publications are available from a local IRS office, on the web at www.irs.gov, or by calling 1-800-TAX-FORM.
If you have any additional questions, please contact our Retired Members Department at (602) 255-5575, or email to
BenefitsGroup@psprs.com.
The information in this document is not an official version of the Arizona Revised Statutes, or applicable laws. If there
are any differences or discrepancies, the official versions will prevail.